Integrated Monetary and Financial Policies for Small Open Economies

Suman Basu, Emine Boz, Gita Gopinath, Francisco Roch and Filiz Unsal ()

Department of Economics Working Papers from Universidad Torcuato Di Tella

Abstract: We develop a tractable small-open-economy framework to characterize the constrained e cient use of the monetary policy rate, foreign exchange (FX) intervention, capital controls, and domestic macroprudential measures. ‘e model features dominant currency pricing, positive premia on local currency debt arising from €nanciers’ portfolio constraints, and occasionally-binding external and domestic borrowing constraints. We characterize the conditions under which the traditional prescription—relying solely on the policy rate and exchange rate ƒexibility—remains su cient, even in the presence of externalities. By contrast, to manage noise trader ƒows into and out of the local currency debt market, FX intervention and in some cases capital inƒow taxes should be used instead of the traditional prescription. Moreover, if a country faces a mix of local currency premia and external borrowing constraints, we establish that certain regulations to limit FX mismatch may alleviate the external borrowing constraint but exacerbate the local currency premia. Finally, we show that capital controls may dominate domestic macroprudential measures in cases when external shocks trigger stress in domestic housing markets.

Keywords: integrated policy framework; monetary policy; capital controls; foreign exchange intervention; macroprudential policies (search for similar items in EconPapers)
JEL-codes: E58 F38 F41 G28 (search for similar items in EconPapers)
Pages: 80 pages
New Economics Papers: this item is included in nep-cba, nep-mon and nep-opm
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https://www.utdt.edu/download.php?fname=_176072651609478200.pdf (application/pdf)

Related works:
Working Paper: Integrated Monetary and Financial Policies for Small Open Economies (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:udt:wpecon:2025-10

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